May 15, 2014

Turkish Coal Tragedy Puts Emphasis on Transition to Clean Energy

In what’s being deemed the worst mining disaster in Turkey’s history, more than 240 miners have been killed and countless more are still missing following a power transformer explosion that triggered a blazing underground fire at a Soma Komur Isletmeleri mine in Western Turkey.

Its an anguishing time for those touched by this tragedy in Turkey and across the globe. Unfortunately, this most recent disaster is also the latest in a long line of incidents reflecting a painful reality – coal is a deadly fuel source that has no place in the 21st century. That’s a big part of the reason why many international financial institutions (IFIs) have moved quickly and decisively away from financing new coal plant expansions around the world over the past few weeks. From the World Bank to the European Investment Bank to the U.S. Export-Import Bank, public financial institutions have overwhelmingly decided that dangerous coal investments should no longer receive public support.

One of these institutions, the European Bank for Reconstruction and Development (EBRD), has made the transition beyond coal a cornerstone of their work in Turkey - and the importance of that step forward is only amplified by this week’s coal mining tragedy.

Straddling the Eastern and Western worlds, Turkey is home to dynamic economic growth that is driving a wave of new energy investment second only to China’s power sector. While currently dependent on fossil fuels -- mainly natural gas -- and home to the fourth largest pipeline of new coal plants in the world, Turkey is also home to fast growing efficiency, wind, and solar markets.

At the same time, the struggle to transition from fossil fuels has run head on into the struggle against an increasingly repressive and authoritarian government led by Recep Tayyip Erdoğan that has clamped down on environmental protests and free speech of all kinds time and time again. The historic - and violently repressed - wave of public demonstrations that spread across the country in May of 2013 was initially sparked by Turkish citizens speaking out against the removal of green space in Istanbul’s Gezi Park. Now, in the aftermath of this tragedy, protesters demanding safe workplaces have been met with tear gas and water cannons.

The situation underscores a dramatic choice. Which of these divergent paths -- either a continued reliance on dirty and deadly 19th century fossil fuels or a new clean energy future -- Turkey heads down will reflect investment priorities, the chance for a healthy future for its citizens and workers, and, in many ways, the global energy transition. This is an important decision that will not only affect Turkey’s energy industry but also its environment and the people of this vibrant country. The choice should be clear: by transitioning away from fossil fuels, the people of Turkey will have cleaner air and water and will no longer be at risk of tragic accidents like Tuesday’s mine disaster.

Prior to this tragedy, I sat down with EBRD’s Director for Turkey, Michael Davey, to learn more about one of the international finance world’s most surprising transitions beyond coal to becoming a potential clean energy leader and the dynamics of this change on the ground. For this conversation, we were also joined by energy expert, Hasan Pehlivan, the principal advisor for the Investment Support and Promotion Agency of Turkey (ISPAT).

Justin Guay (JG): EBRD recently made headlines with its new coal finance restrictions -- restrictions that were applauded by organizations around the world. What’s the future for EBRD energy investments in Turkey now that coal is off the table?

Michael Davey (MD): Energy was a high priority from day one, but the focus was on sustainable energy. There have been a number of requests for coal, particularly in northern parts of Turkey, who have a desire to privatize and rehabilitate lignite plants. That meant a number of requests to be involved in coal. But we turned them down. There is simply so much we could do with gas, efficiency or renewables in Turkey. So in reality, this recent change in policy has made no difference to the operations in Turkey.

JG: Many IFIs claim to be demand-driven when justifying new dirty coal investments yet fail to support clean energy. Why are you so bull-ish on renewable energy and energy efficiency?

“We’re demand-driven, and the demand for clean energy is there.” – Michael Davey

MD: It’s not just our energy investment portfolio either. We’ve had deep engagement on sustainable energy policy development in the country – thanks to strong demand from the Turkish government. We’ve provided a number of background studies and technical assistance and helped with the regulatory reforms required for promoting sustainable energy. For example, we undertook a review of geothermal potential in Turkey as well as a review of potential for WTE (waste to energy), and pioneering climate change studies. Much of this is driven by the EU accession process and requirements to bring the country in line with EU norms on energy.

Shortly after we started working in Turkey, we worked on regulations to finalize feed-in tariffs and the environment for investing in renewable energy. We also created another initiative: mid-size sustainable energy and financing facility that has deployed about a billion euros of long-term money, under a securitization structure, at fairly good interest rate. We’ve also created finance facilities through local banks that have helped them develop lending for sustainable energy to SMEs and businesses. Although they’re relatively complex facilities, banks have come back after second and third rounds.

On the energy efficiency side, there’s been quite a lot. We built a framework (300-400 million euros) to get banks to engage in lending. It’s taken work to get investments moving but it’s now starting to bite. We’ve also been going around in a systematic way, offering free energy audits and using that as a basis for loan intervention to support EE investments at enterprise level.

JG: What role do you see for shale gas?

“In Turkey, we do not expect a shale gas boom like in USA” -- Hasan Pehlivan

Hasan Pehlivan (HP): Not in Turkey, no. But further potential shall be explored. There has been drilling for shale – a couple of holes to take a look at the availability of shale gas. In a country where there is no oil, likelihood of having shale gas will be a question. We won’t see a shale gas boom in Turkey. We do not expect a shale gas boom like in USA.

JG: Back to the EBRD portfolio -- Turkey has a big pipeline of wind projects, but solar is just getting off the ground. What’s next for the Turkish solar market? Do you have any projections for the size of the market? Do you see distributed gen or utility scale driving investment?

“You have to remember that in Turkey, people love solar.” -- Hasan Pehlivan

MD: The solar market is starting to emerge. We’ve been sitting back and waiting. But we do expect to see a lot of solar in the future.

From the government’s perspective solar is being supported carefully. They monitor Europe and what happens in Europe, including recent experience with feed-in tariffs. There were issues when solar companies have had difficulties when government cuts feed-tariffs so they want to be careful. The relatively modest feed-in tariffs reduce the prospect of any negative regulatory change.

HP: For instance, the government started with 600-megawatts of solar in June, and there were 500 applications – a huge demand. Since then, we finalized new policies for distributed solar that eliminates the requirement for a license for new plants up to one-megawatt. That means people can install their homes, industrial zones much faster and easier so long as they’re not selling back to the grid. This has proven very popular. Since this was put in place in October, 20-megawatts have already applied.

HP: You have to remember that in Turkey, people love solar. On top of every house, solar water-heating systems exist. Culture is there. Turkey has the highest solar energy potential within Europe. In next 10 years, we expect to see 3,000-megawatts with an additional capacity of 2,000-3,000-megawatts just from distributed generation.

JG: So does that mean they don’t need government approvals for establishing distributed solar systems? What about net metering?

HP: If they don’t have any ambition to sell to the grid, they can install on top of the roof. No permission needed. If they need to connect to the grid, they need to apply to their distribution company. They must agree to sell to, to provide it to the grid. In organized industrial zones, there are usually large transformer stations.

Connection to the grid is usually not an issue. For the residences, there needs to be work done (technology-wise). Metering needs to be replaced by a distribution company. There is time for the residences to sell to the grid, but if you’re not interested in selling to the grid, no worries.

Some companies want to develop large solar farms, but there is a limited availability of licenses. So companies are applying for the one-megawatt licenses –individually as separate entities, but also in aggregate, forming solar arrays as big as five to 10-megawatts. They connect to the grid, and it’s an interesting development. It is a market solution that is fine and not beating any rules.

JG: Any Final thoughts?

HP: We expect investment to double the capacity over 10 years. That’ll create a huge economy. Turkey has already received a lot of foreign direct investment – 30 percent coming from energy. Many of these sustainable energy projects are now becoming feasible, and even better things are clear on the ground.

MD: In Turkey, the underlying demand dynamics are strongly supportive of long-term healthy demand for clean energy, and its climatic and geographic elements also provide significant opportunity for substantial on-going investment into wind, solar, and geothermal.

We’re also impressed with extent and depth of engagement with the Ministry of Environment on sustainable energy issues. That combined with a very strong banking system and appetite for working on complex products like mid-sized sustainable energy is positive. All told, we have to be fairly pleased at what we’ve done in Turkey.

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